The Psychology of Trading
Post By: Renzo Bazargani
Psychology is defined as the mental characteristics or attitude of a person or group. In other words, it refers to mindset, frame of mind, and thought processes, which lead to one's behavior and/or actions. As a result, habits and patterns are formed. Every aspect of life revolves around patterns—work, relationships, money, health, leisure, and trading/investing. Therefore, mindset shapes identity, and identity is a choice, which is closely tied to self-image and self-worth. Your self-image will determine whether you achieve success in various aspects of life. Thus, it is crucial to recognize and address self-sabotaging beliefs, which are nothing more than patterns ingrained at a subconscious level.
When it comes to trading, success ultimately depends on the specific actions you take daily. The mind then reinforces these actions into patterns. These patterns directly impact your results—Profit and Loss (PnL). As Mark Minervini, a highly successful trader, wisely stated: “The difference between mediocrity and greatness lies in the fundamental belief that discipline is not merely a principle of trading but a principle of greatness. Managing risk requires discipline. Sticking to your strategy requires discipline. Even if you have a sensible plan, if you lack discipline, emotions will creep into your trading and wreak havoc. Discipline leads to habit. They can be good habits or bad ones; it´s a matter of what you discipline yourself to do over time.” This statement is profoundly true. Having the best trading strategy, system, or methodology will not matter if you do not have the right mindset and discipline to be a consistent winner in this business.
Many people enter the trading/investing world with unrealistic expectations, believing they will make vast amounts of money and become millionaires within a year or two. They lack a strategy and, more importantly, have no risk management plan. Some may get lucky and experience short-term success, but eventually, they will blow up their accounts and lose everything. As a result, most will quit, while those who persist will realize that trading successfully requires far more time and knowledge than they initially anticipated. This is when they start taking trading seriously—learning real methodologies and establishing rules. After a period of trading, refining their strategies, and modifying their rules, they often realize that their lack of success stems from within—specifically, the difficulty of maintaining discipline and following their trading rules, which is usually driven by fear. At this stage, many traders will quit, but the truly passionate ones will persevere, determined to understand themselves better—no matter the effort required. Just like elite athletes, doctors, or entrepreneurs, successful traders must endure years of learning, gaining knowledge (including self-awareness), practicing, failing, and working hard before they achieve mastery and financial success. I always tell people it takes at least 10 years to become an expert in any field. Successful trading is no exception.
Understanding Trading Fears and Common Errors
Before discussing the right mindset for successful trading, it's essential to identify the common fears and mistakes traders make. These fears are often tied to ego and include:
Fear of being wrong
Fear of losing
Fear of missing out (FOMO)
Fear of leaving money on the table
Some common trading errors include:
Hesitating to enter trades
Failing to predefine risk
Ignoring stop-losses, leading to larger-than-planned losses
Entering trades prematurely before a setup is fully formed
Not letting profits run
Freezing under pressure (choking)
Many traders focus on these fears, unintentionally creating a cycle of repeated failures. Furthermore, a lack of discipline can lead to bad habits (impulsive behavior) over time, such as revenge trading, playing catch-up, overtrading due to an adrenaline rush, being inconsistent with trading processes, or developing biases about market direction. Instead of waiting for the perfect setup, traders act on emotions, leading to suboptimal results. However, once the right mindset is developed, these fears and mistakes fade away because traders shift their focus and build new, positive habits (patterns) over time.
The Right Mindset for Successful Trading
A strong trading mindset consists of:
Pre-market preparation
Thinking in probabilities
A carefree state of mind to execute trades comfortably and without hesitation
Patience
Focus and mindfulness (being present and objective)
Consistency and fearlessness
Post-market reflection
Since this post focuses on trading psychology, I won't go into detail about pre-market preparation and post-market reflection, as they are self-explanatory. Pre-market preparation involves analyzing market conditions before the open, such as key levels, trends, bull/bear scenarios, trading plans, market breadth, volatility, previous day's range, and economic events—essentially, the type of analysis provided in PalmaFutures Newsletter. Post-market reflection, on the other hand, involves reviewing trades, assessing performance, identifying areas for improvement, and mentally resetting for the next session.
Thinking in Probabilities: The Key to Consistency
Unprofitable traders focus too much on individual trades (trade-by-trade basis) and their immediate outcomes. They enter trades with expectations and become emotionally attached to results. They are obsessed with the outcome instead of focusing on the process. They always have a reason for entering a trade, and if the outcome is a win, they believe their reasoning was correct and feel good about it. The next time, they enter a trade for the same exact reason, expecting another win, but instead, it results in a loss. Consequently, they become upset and feel betrayed, thinking their reasoning or methodology was flawed, leading to hesitation in future trades. Over time, this creates a vicious cycle; as a result, they trade based on fear and continue making all the errors mentioned above.
Conversely, a profitable trader does not have expectations and sees every trade as random. They are flexible and focus solely on the process by staying present and objective while patiently waiting for their setup to form. Once they execute a trade, they genuinely don’t know what will happen. If it goes their way, they exit at their profit target; if it doesn’t, they exit at their predefined risk—no overthinking required. They are fearless and unemotional because they understand that their methodology does not guarantee a winner on a trade-by-trade basis but rather over a series of trades, such as 45 trades. Furthermore, they recognize that the market moves up or down due to an imbalance of conviction—big buyer(s) push the market up, and big seller(s) push it down. This movement has nothing to do with their methodology or reasoning—there is absolutely no correlation. Essentially, traders rely on the behavior of other market participants to make their trade a winner, using mathematical formulas or price patterns on a chart to anticipate their actions. Prices move through the imbalance of conviction, forming patterns based on that imbalance. Therefore, whether a trader wins or loses a trade has nothing to do with their methodology, system, edge, or any other reason. Once they shift their perspective from focusing on individual trade outcomes to thinking in probabilities—understanding that each trade has a random outcome but consistency emerges over a series of trades—all the fears and errors mentioned above will disappear. This is exactly how one becomes a consistent winner.
Developing the Right Habits for Long-Term Success
Building the right mindset requires consistent practice and commitment. Your trading methodology should include:
Defined risk parameters
Money management rules (position sizing)
Profit objectives
A trader is profitable because winning trades outnumber losing trades and/or the average win is greater than the average loss. Additionally, it is critical to fully trust and have confidence in your methodology.
To develop consistency, commit to taking the next 45 trades strictly following your methodology, managing risk and reward for each trade, avoiding emotional reactions, and completely forgetting about the outcome on a trade-by-trade basis. When you are putting on the trades think in probabilities by managing your expectations for each trade. After completing these 45 trades, review your performance objectively, then repeat the process. The goal is to trade consistently and fearlessly, focusing solely on execution rather than short-term outcomes.
Final Thoughts
Bottom line: successful traders think in probabilities, have no expectations, make quality trading decisions, follow their methodology with discipline, and trade without fear—day in and day out (consistency). Additionally, they continuously monitor their performance (statistics), making minor adjustments when necessary, whether due to shifts in market behavior, temporary personal challenges, or subconscious self-sabotaging beliefs. Making adjustments could include trading with less money or doing nothing until the circumstances change in the markets or at home. Furthermore, great traders take care of their minds and bodies by maintaining a healthy lifestyle—eating well, getting quality sleep, exercising, meditating, and using performance-enhancing techniques like visualization.
I hope this post was helpful to you. If you have any questions or feedback, feel free to comment below!
Great insight...best article I have read in a long time based on trading psychology...keep up the good work!
I opened an account in January with 10k to trade 0DTE SPX spreads. Iv gotten as high as 14k as low as 8k and sitting at 9.5k today. Discipline is what i lack. I have a trade plan but i tend to let my loses run and always exit to soon on my winners. I use fib extensions to pick my levels on where i want to set up my trade and im pretty accurate on the levels i choose but my timing on entry is weak. Thanks for the post